The ABCs of RMDs. RMD Timing

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1 RETIREMENT PERSPECTIVES The ABCs of RMDs April 29, 2015 Brian Dobbis, QKA, QPA, QPFC, TGPC Director, Retirement Solutions 125 Views Nearly everyone with a tax-deferred retirement account is required to start taking minimal withdrawals at some point. Knowing the different rules for IRAs and qualified plans may avoid a costly error. In general, participants in employer-sponsored retirement plans and IRA account owners must start taking lif etime required minimum distributions (RMDs) soon af ter they turn 70½. The RMD rules apply to all qualif ied plans, including 401(k), 403(b), and 457(b) plans. In addition, minimum withdrawals also apply to employer-sponsored IRAs, including SEP, SAR-SEP, and SIMPLE accounts. Complicating matters f urther, while designated Roth accounts and qualif ied plans are subject to lif etime RMDs, Roth IRAs are not. It is the responsibility of plan participants and IRA owners to make sure that they withdraw the correct amount each year f rom their account. Failure to do so can result in stif f penalties. Here, then, is a quick guide to highlight the RMD rules that apply to both IRAs and qualified plans to help account owners and participants avoid potential pitf alls. RMD Timing IRAs (including traditional, SEP, SAR-SEP, SIMPLE, but not Roth): In general, individuals are required to take their initial RMD by December 31 of the year in which they turn 70½, although the initial RMD can be def erred until as late as April 1 of the f ollowing year. In that case, two RMDs will be required the f ollowing year. For example, Sarah turns 70½ in She can either take her first RMD in 2015 or delay until as late as April 1, Assuming she delays until 2016, Sarah will need to take two RMDs in And she will be required to take one each year thereafter by December 31. An individual who is 70½ or older is eligible to participate in a SIMPLE IRA, assuming that all SIMPLE IRA eligibility requirements have been satisf ied. However, the individual must still take minimum distributions. An individual 70½ or older is eligible to participate in a SEP IRA, assuming that all SEP IRA eligibility requirements have been satisf ied. However, the individual also must take minimum distributions. Roth IRAs are not subject to lifetime RMDs for either the account holder or a surviving spouse. A non-spouse beneficiary is required to take minimum distributions. Qualified Plans (including 401(k), 403(b), 457(b): Unlike with an IRA, investors generally are able to delay their initial RMD until April 1 f ollowing 1

2 the year in which they turn 70½ or the year in which they retire whichever is later. This option is available to those participants who are less than 5% owners of the business sponsoring the plans. Participants who own 5% or more of the business sponsoring the retirement plan must take their f irst RMD by April 1 f ollowing the calendar year in which they turn 70½, regardless of retirement age. Although it is uncommon, a plan may specif y that all participants take an RMD at 70½, regardless of work status. (Check the summary plan description (SPD) f or your plan s rules.) RMD amounts IRAs (including, traditional, SEP, SAR-SEP, SIMPLE): RMD calculations are based on the value of the accounts on December 31 of the preceding distribution year and on the life expectancy of the account holder, based on the IRS Uniform Lifetime Table. If the account holder s spouse is the sole designated beneficiary, and more than 10 years younger than the account owner, the Joint Life and Last Survivor Expectancy Table is used instead. Investors with multiple accounts must calculate the RMD separately f or each IRA owned (including SEP and SIMPLEs). However, the resulting total RMD amount may be taken f rom any one or multiple IRAs. Multiple accountholders may want to consider consolidating or rolling over separate IRAs into a single account to simplify the RMD process. Qualified Plan (including 401(k), 403(b), 457(b)): Like IRAs, RMDs are based on the account value on December 31 of the preceding distribution year and on the lif e expectancy of the account owners, using the IRS Unif orm Lifetime Table. If the account owner s spouse is more than 10 years younger, the Joint Life and Last Survivor Expectancy Table is used instead. In general, individuals who have more than one employer-sponsored qualif ied plan must calculate and take an RMD f rom each separate account. An exception is 403(b) plans: Individuals still need to calculate the RMD f or each account separately, but they can withdraw the total amount f rom any one or more of their accounts. Unlike Roth IRAs, designated Roth 401(k), 403(b), and 457(b) accounts are subject to lif etime RMDs. (For more information, see my blog, IRAs: RMD Mistakes to Avoid. ) Tax Implications IRAs and Qualified Plans: Distribution amounts drawn f rom deductible (pretax) contributions and earnings are taxed as ordinary income, subject to f ederal and state income tax (if applicable). The portion of distributions applicable to nondeductible (af tertax) contributions potentially can be recovered tax-f ree. It is the IRA owners responsibility to keep track of their basis, whereas with qualif ied plans, it is the responsibility of the plan sponsor. A penalty of 50% is applied for failure to take an RMD. The penalty (reported on IRS Form 5329) is 50% of the amount that was due to be distributed, but wasn t. The IRS has leeway to waive the penalty for good cause. 2

3 You are not permitted to roll over an RMD to either an IRA or a qualified plan. Frequently Asked Questions To further help you understand the lifetime minimum distribution rules, we offer answers to some f requently asked questions: Q. Am I allowed to take more than the RMD amount? A. Yes. Q. Can a distribution above the RMD amount taken in one year be applied to the RMD for a future year? A. No. Q. Can I arrange to have an RMD of a qualified plan distributed from my IRA or vice versa? A. No. If you participate in more than one qualif ied plan, your RMD f or each plan is determined separately and distributed f rom its respective plan. However, if you have multiple IRAs, you can withdraw the total RMD amount f rom any IRA account or accounts you choose. Q. Can I roll over my RMD to an IRA, Roth IRA, or other eligible retirement plan? A. No. If you choose to roll over your RMD, it will be treated as an excess contribution and potentially would be subject to taxes and/or penalties. Q. If I convert my traditional IRA to a Roth IRA, would I still have an RMD? A. Anyone, regardless of age, can convert traditional IRA assets to a Roth IRA. Although the amount of the RMD is required to be distributed prior to the conversion, RMDs would cease for all future years. For example, Tom s 2015 RMD is $5,000. Tom must distribute his RMD prior to converting his IRA to a Roth IRA. Assuming the rest of his IRA is converted, Tom will never be required to take another RMD. For additional inf ormation on RMDs, ref er to my blogs, IRAs: FAQs about RMDs and IRAs RMD Mistakes to Avoid. This is being provided for general educational purposes only and is not intended to provide legal, tax, or investment advice. Please consult with your financial advisor for more detailed information or for advice regarding your individual situation. To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter. Traditional IRA This is an individual retirement savings account in which contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies. A 401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an after tax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis. 3

4 A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax-deductible, but withdrawals during retirement are generally tax-free. SEP IRA A Simplified Employee Pension Plan is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP IRA plan for your business, you and any eligible employees establish your own separate SEP IRA; employer contributions are then made into each eligible employee's SEP IRA. SAR SEP IRA A Salary Reduction Simplified Employee Pension Plan is a simpler alternative to a 401(k) and is available only to companies with 25 or fewer employees. It gives employees the opportunity to make contributions to their SEP accounts with pretax dollars and reduce their current year's net income. Also called a 408(k) plan. SIMPLE IRA A Savings Incentive Match Plan for Employees' IRA is an IRA-based plan that gives small-business employers a simplified method to make contributions toward their employees' retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an individual retirement account (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis. Qualified Retirement Plan This is a savings plan that is allowed certain tax advantages because it meets criteria spelled out in the IRS Code and in the Employee Retirement Income Security Act [ERISA] of Employers can take tax deductions for any contributions they make to an employee's account. Employee contributions and investment returns are tax-deferred until withdrawn. Contribution limits apply, as do penalties for early withdrawal. 403(b) A qualified retirement plan for certain employees of public schools, tax-exempt organizations, and certain ministers. Generally, retirement income accounts can invest in either annuities or mutual funds. Also known as a tax-sheltered annuity (TA) plan. 457(b) plan A 457(b) is a nonqualified, deferred-compensation plan established by state and local governments, taxexempt governments, and tax-exempt employers. Eligible employees are allowed to make salary deferral contributions to the 457(b) plan. Earnings grow on a tax-deferred basis and contributions are not taxed until the assets are distributed from the plan. The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision. Investors should carefully consider the investment objectives, risks, charges and expenses of the Lord Abbett Funds. This and other important information is contained in the fund's summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, you can click here or contact your investment professional or Lord Abbett Distributor LLC at Read the prospectus carefully before you invest or send money. 4

5 Not FDIC-Insured. May lose value. Not guaranteed by any bank. Copyright 2018 Lord, Abbett & Co. LLC. All rights reserved. Lord Abbett mutual funds are distributed by Lord Abbett Distributor LLC. For U.S. residents only. The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances. 5